Cousin Greed and Cousin Fear Make an Uncertain Mr. Market

By Jeffrey Cooper  MAY 16, 2012 11:40 AM

Let price be the final arbiter on whether stocks have bottomed.



People are crazy and times are strange
I’m locked in tight, I’m out of range

- "Things Have Changed," Bob Dylan

Millionaires don’t use astrology, billionaires do.
- J.P. Morgan

After Bernard Baruch traveled to South America to investigate copper companies, he returned to New York and made a presentation to J.P. Morgan.

Baruch concluded the meeting by saying, "Mr. Morgan, I think it's a good gamble."

Mr. Morgan shouted back, "I never gamble," and threw Baruch out of his office.

Times change, don't they, though, Mr. Dimon?

Throughout the first quarter, we were concerned about the cycles, specifically the 50-year Biblical Jubilee Cycle (600 months) from 1962 that pointed to a top in February or March.

Ditto the 900 month, 75-year cycle, that topped in March 1937. Of course, this was roughly 60 months after the big low in 1932. I suspect that most market participants at the time did not believe another near-death financial experience would occur in their lifetime.

They were wrong.

If they bothered to look around, it was probably conspicuous to most that the Great Depression was ongoing.

However, the continued rally into the Spring of 1937 probably led many to believe that the market was shrugging off the economic malaise, and that the economy would catch up to the market.

They were wrong. The market caught up to the economy.

There is much truth, but little logic on the tape. Sometimes the market knows everything. Sometimes the market knows nothing.

Mr. Market is a funny guy. As the incestuous offspring of Cousin Greed and Cousin Fear, he amuses us. Sometimes the movements are explosive like Joe Pesci in Goodfellas; sometimes the pratfalls are good-natured, like Chevy Chase's imitations of Gerald Ford taking a header.

The mood from runaway moves in stocks in the first quarter to waterfall declines in the second quarter exemplifies the binary inbreeding of Cousin Greed and Cousin Fear, the idiot-savant offspring of whom is Mr. Market.

Mr. Market is unable to make decisions and can't decide for himself, but he can tell you in a nanosecond exactly how many hundreds of matches just fell on the floor.

This brings us to the other harmonic of the 600-month and 900-month cycles: The 300-month cycle, which is 25 years old, tying to 1987. Yesterday, we showed the analogue of the 1987 crash. Of course, the October crash in 1987 was roughly opposite the calendar from May.

Be that as it may, the market is not a fine Swiss watch.

If the market gets past the 49 to 55 day Gann Death Zone (off the April high) and holds above 1285, then a further dramatic plunge in the indices may be avoided. That said, it's a market of stocks and not a stock market, and more than a few high fliers have been in an Icarus look-alike contest for the last month. Knowing that April 2 squared 1422 on the S&P 500 (^GSPC), as noted in this space going into that time frame, would have allowed one to sidestep many air pockets.

Click to enlarge

The S&P closed below the key 1332/1333 pivot yesterday, which is two times the key March 2009 low. So, will the SPY plunge to 130, which ties to S&P 1300 for options expiration?

An hourly SPY suggests that’s possible as waterfall declines often occur from 3rd lower highs.

In addition, the recent sideways hourly consolidation around 136 may prove to be a mid-point if we see continuation which also targets 130.

This idea of waterfall declines from 3rd lower highs plays out on all time frames.

Such was the case with Amazon (AMZN) on Tuesday:

The market has a penchant for playing out in threes. Many dramatic and climatic moves occur following three drives to a high or three drives to a low.

What concerns me is that the Quarterly Swing Chart on the S&P shows three drives up from the 2009 low. Combined with the cycles due to exert their influence no later than the end of March, the three drives up suggested the possibility of a significant decline.

Despite serious Air-pocketism in many individual names, the S&P has not yet turned its Quarterly Swing Chart down. Given the bearish behavior on the turn down of the monthlies, the normal expectation would be to see the quarterlies turn down. For that to occur in the second quarter, the S&P would need to decline below the first-quarter low, which was the January low at 1285.85. This is a critical level as it ties to the two big trading day time/price squareouts for which we were looking that occurred at the end of October 2011.

We walked though those in this space again yesterday. Offsetting the October high in January implied higher prices. Violating the breakout over the late October highs implies lower prices. This 1285 level also ties to the 200 day moving average (or DMA). So this is the key level for the bull case. If the Quarterly Swing Chart is going to turn down in the third quarter, it will occur on trade below whatever low is defined in the second quarter.

As you can see, if the S&P can decline to below 1285.85 by at least 1 tick in the second quarter, there will be an earlier chance to take the temperature of the market.

Otherwise, this is going to be a more protracted decline, even in the bull case. If the market indices avoid a cascade in this panic window through the end of the first week of June, then the next pivotal time period should be the first week of July. This is 90 degrees in time from this year's April 2 high. This may mirror the idea of the primary high being July 2007, followed by a sharp break and a secondary high 90 degrees later in October 2007. This caused some to believe we were not only out of the woods, but would melt up into the end of 2007.

Didn't really work out.

A few things of importance to note in the quarterly S&P:

1. This year's high followed a test of the low of the high-bar quarter from 2007.

2. Note the two big higher lows since 2009 were both quarterly Plus One/Minus Two buy setups!

3. The bottom rail of a quarterly channel comes in at around 1121. Sound familiar? It should because this is the mid-point of the entire bear market from 1576 to 666! To me, the picture suggests that a break of the mid-point from last October's 1075 low to this year's 1422 high (1248) could result in a drop to 1121.

If this plays out, whether the S&P gets there by elevator or escalator is anybody's guess.

Theoretically, a decline to the bottom of the quarterly channel could be a bullish third higher low.

If this should play out into the fall, specifically October, which marked the 50-year cycle climatic low in 1962, it would tie to a 60-month period from the October 2007 high.

We've seen some big turns take place in these 60-month periods: The 1982 low to the 1987 high, the 1995 kickoff to the 2000 blow-off top, the 2002 low to the 2007 high, and of course, the 1932 low to the 1937 high.

The T-Rex in the ointment is that we have moved into the second half of the bear market that began in 2007.

We are in the wheelhouse of a possible cascade setup:

Below 1275-1285 suggests 1248 (see above). Below 1248 suggests 1121. While the S&P survived a decline below this 1121 mid-point of the bear in 2010, it is important to remember a few things:

1. This is when the Fed unleashed QE.

2. The S&P did not remain below 1121 long.

3. There was not a defined channel underpinning 1121 as critical support yet in 2010.

4. There was no monthly close below 1121 in 2011. The lowest monthly close in 2011 was 1131.

In tomorrow's report, I'll delve into what concerns me about the differences and similarities between the current pattern and 1929/1982/2012, and the possible implications.


It looks like the third wave of something is playing out. This seems to be confirmed by the outside-down month in the Dow Jones Industrial Average.

We may be dealing with a big picture third of a third. In other words, a wave 1 down from 2007 to 2009 and a wave 2 up into the Spring of 2012.

If it is a big third of a third, all support exists to be broken and TIME will be more important than price.

While many market participants and observers thought the S&P recapturing its 50 DMA with authority in April put the market back in gear and was likely the beginning of a new up-leg, it is notable that there was never a follow-through day after the April 24 low.

The skein of eight out of 10 losers on the S&P says the odds are in favor of an up day today. But as shown last week, the VIX (^VIX) is breaking out from an Inverse Head & Shoulders and suggests more immediate weakness.

Oversold can become more oversold.

There are more than a few strategists looking for a low, one reason being we are near 270 degrees from the waterfall decline that ended the first week of August 2011. However, it looks to me like the market accelerated at the end of the first week of May, coincident with this cycle. Moreover, I don't think this idea of a low is taking into consideration the bigger-picture cycles, some of which were mentioned above.

Finally, I can't help but recall that in the days just prior to the crash in 1987, there were quite a few cycle guys calling for a low. They bought the market on the Thursday and Friday before Black Monday.

Well, they were right; there was a low around the corner.

But a few days made a lot of difference.

I would let price be the final arbiter of if and when a climatic low is playing out.

Price confirmation is a persuasive instrument in validating one's opinions.

In the meantime, a chart of the Dow Jones World Index shows a bearish droop right shoulder, such as occurred in 1929.

Things have changed.

Twitter: @JeffCooperLive

No positions in stocks mentioned.

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